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529 Plan Moves to Make Now

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The notice at the bottom of every advertisement for a 529 savings plan includes the warning: "Accounts may lose value." Millions of disheartened parents are now all-too-aware of just how accurate that statement is as they open their September account statements and see that their 529 savings accounts have, in fact, lost money.

The stock market swoon of recent weeks has not only caused account values to drop but in many cases has created losses, as balances drop below original contributions.

So what are parents to do as they fret about losing money in their college savings accounts at the same time that college costs continue their relentless rise? Here are some suggestions, based on the current age of your child.

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Ages 0-10
Take a deep breath and resist the urge to flee your 529 plan. Of course your account is down, but going forward, the stock market still offers the best chance for your college savings account to appreciate at a rate that keeps up with college cost increases. You'll have to stomach the ups and downs along the way, but, if history is any guide, you should be rewarded in the end. In fact, with stocks currently on sale -- at least according to Warren Buffett -- you may want to pump as much cash as you can into your 529 plan.

By investing in your 529 plan's age-based option, you'll be in position to benefit from a stock market rebound and can rest assured that by the time your child gets close to college age, your account will have automatically been switched to lower-risk bonds, money market or stable-value funds.

Ages 11-16
Any money you already have in your 529 plan has probably taken a hit, but you have at least a couple of years before the college bills start coming. Are you bullish on the stock market over the midterm, or do you think the sinking economy suggests a protracted bear market? If you are bullish and willing to accept some market risk, you may want to switch to one of the "static" options in your 529 plan that stays invested mostly in stocks.

Sticking with an age-based investment option has the unfortunate consequence of locking in your current losses as it shifts from stocks to bonds and money market funds. If you believe the market still has substantial downside momentum, you may want to head in the opposite direction and switch now to the most conservative option in your 529 plan -- either a money market portfolio, a guaranteed or stable-value portfolio, or a bank CD option.

Age 17 and older...Read More